Forensic Tools for “Fuzzy” Due Diligence

Article – August 2013

Corporate / Transaction Advisory

A white paper written by our expert panel discussing three types of emerging non-financial due diligence that can uncover threats and identify opportunities to improve transaction economics and frame post-acquisition processes.

By: Matthew Morris of RGL Advisors, Simon Oddy of RGL Forensics, and John Pensom of PeopleInsight

There are many forms of due diligence, beyond the financial analysis, that can have a significant impact on the outcome of a deal. Here we discuss three of the emerging forms:

Customer due diligence

Insurance and risk management due diligence

HR due diligence

These types of non-financial due diligence can uncover threats and identify new opportunities to improve transaction economics and help frame post-acquisition processes.

According to the Q1 Middle Market Indicator from the National Center for The Middle Market, in 2013 middle market companies are continuing to grow, have more confidence in the global and US economies, and predict to invest extra cash instead of holding it. All of these are likely to be good signs for middle market deal flow in the coming months. As these investments increase, business owners and investors are placing renewed emphasis on identifying, qualifying and optimizing deals. A key step is conducting due diligence on the target company to identify the implications of a potential transaction, particularly the non-obvious ones.

Yet evaluating a potential deal and investigating a target company requires more than a cursory review of the financial statements and pre-packaged reporting. Adding forensic investigative techniques reflected in emerging due diligence trends can greatly increase the likelihood of a successful deal.

Forensics and Fuzzy Due Diligence

It’s important to make the data work for you when considering a merger, acquisition or non-controlling investment. By adding a forensic element to due diligence, you greatly increase your ability to evaluate a deal, adding an investigative and analytical slant to top-level observations. Forensic due diligence takes a data-driven approach to evaluating a target company and provides quantitative analysis upon which to base a go/no-go decision.

Conducting a thorough course of due diligence using analytic tools not only helps identify opportunities within a deal, but also guides post-acquisition integration activities.

By “fuzzy,” we are talking about non-financial forms of due diligence – those that may be considered less often in the normal course of business. In part, this is because such forms of due diligence can be difficult to refine into actionable decisions given their undefined nature. However, these non-financial analyses can be completed within an accelerated timeframe and can have significant impacts on the outcome of the deal.

So let’s discuss some of the analytic trends, both new and existing, that can advance deal success.